InvestSMART's Conservative Portfolio: March Quarter Review 2021

It was a slightly strange quarter for the Conservative Portfolio in that it was its defensive assets that suffered falls while the growth side surged. It's rare to see a quarter of trade like the one we have just seen, and you need to put it into the perspective of your risk profile and your investment time horizon.
By · 14 Apr 2021
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14 Apr 2021 · 5 min read
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First, we should address the fixed income side of the portfolio and we stress the following point – fixed income is one of the core asset classes of any investment portfolio. It provides a strong and solid foundation; its income component provides a consistent long-term income rate, and the capital component is majority backed by sovereign governments or tier-1 corporations.

But we also need to remember that fixed income, like any floating market, can be subject to short bouts of volatility. Its normal advantage is that these bouts of volatility are mild in comparison to its riskier peers such as equities and property but that’s not always so.

In the Conservative Portfolio we hold the iShares Australian Fixed Income ETF (IAF) for your Australian treasuries’ exposure. Its biggest holding is the Australian government 10-year bond and as this chart shows very clearly, the Australian 10-year bond was sold off in the quarter causing its yield to rise which saw IAF’s sell off mirroring that of the 10-year.

This fall was not isolated to just Australia. Internationally, treasuries suffered a similar fate and actually led to a debate over the merit of fixed income, with some even suggesting it’s facing an ‘existential crisis’ and that it no longer has a place for investors. This is disingenuous, as the same chart above shows the incredible positive movement throughout 2019. We even warned investors back then that that kind of appreciation was abnormal in the fixed income sphere and not to expect this kind of move on a long-term basis.

We are here to remind you of the same point but in reverse – fixed income will return. If we look at the Australian 10-year bond, its price is currently below its ‘face value’ (for more on the inner workings of fixed income, click here to view our fixed income series)

Furthermore, the performance of the Conservative Portfolio during this period needs to be looked at in the context of risk and your tolerance of risk. It also needs to be looked at in terms of your time horizon.

The minimum investment time horizon for a conservative investor is 2 years so if we compare the ASX 200 to the Conservative Index, it puts the last quarter in perfect perspective as this chart shows.

The intra month and quarterly movements of the Conservative Portfolio are significantly less than that of the ASX 200 which is exactly what one should expect. The other advantage illustrated here is that the portfolio does have some exposure to growth markets being the ASX 200 (IOZ) and the Global Index (VGS) meaning it captures some of the outperformance over its more defensive assets but is buffered from the falls risk markets are exposed to i.e., COVID-19.

Investors should continue to apply their personal risk tolerance to their investment goals and although the portfolio was flat over the past quarter, its overall long-term performance shows that it is one of the best investment options to absorb volatility in the market but outperform the single asset classes like cash.

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Evan Lucas
Evan Lucas
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